Easing Middle East Tensions Benefit Chemical Stocks; MDI Operating Rate Rebounds Significantly

Overview

This weekly report focuses on the impact of easing Middle East conflicts on China's oil, gas, and chemical sectors. UBS notes that as the US and Iran reach an agreement to reopen the Strait of Hormuz, if the situation stabilizes quickly, the average Brent crude price in Q3 is expected to stabilize at $85/barrel. Against this backdrop, the report reviews high-frequency data on operating rates and inventory in chemical sub-sectors, finding a rebound in prosperity for segments like MDI, and accordingly selects preferred beneficiaries of cost declines and valuation repairs, while highlighting short-term divergence risks among companies with different process routes.

Core views

Regarding geopolitics and oil price outlook, the report points out that the US and Iran have reached an agreement to reopen the Strait of Hormuz, expecting the blockade to be fully lifted immediately. Based on the assumption of a quick resolution to the conflict, UBS forecasts the average Brent crude price for Q3 2026 at $85/barrel. Although oil prices may fluctuate before signing, the rebound in crude demand will support prices. Domestic refining data shows that last week, the average operating rate of state-owned refineries decreased by 0.6 percentage points month-on-month to 67.18%, and independent refinery operating rates fell by 2.5 percentage points to 48.6%; China's total crude oil inventory decreased by 16 million barrels month-on-month to 1.28 billion barrels. Chemical product operating rates show structural divergence. The highlight is the significant 9 percentage point week-on-week increase in MDI operating rate to 83%, indicating a favorable supply-demand landscape in this segment. In contrast, the polyolefin chain is under pressure, with naphtha-based ethylene operating rates dropping to 77%, and PE and PP operating rates falling to 80% and 63% respectively. In the aromatics chain, PTA operating rates slightly recovered to 65%, but polyester filament operating rates slipped by 4 percentage points to 76%. Additionally, titanium dioxide operating rates remained flat at 79%, while TDI operating rates declined by 3 percentage points. Inventory data validates the destocking trend in certain links. Sample data shows that PE, PVC, and polyester filament inventories all achieved week-on-week declines, with polyester filament seeing the strongest destocking, a weekly drop of 16%. Although still high year-on-year, marginal improvement is evident. PP inventory increased slightly by 4% week-on-week but fell 21% year-on-year. Titanium dioxide inventory rose 27% week-on-week but dropped significantly by 49% year-on-year, remaining in a historically low range. Organic silicon DMC inventory also continued its dual decline trend both month-on-month and year-on-year.

Analysis framework

The report adopts an analysis framework of 'macro event-driven + high-frequency fundamental verification'. First, it establishes a baseline assumption for crude oil prices by tracking geopolitical developments in the Middle East (progress in US-Iran negotiations), thereby deducing the cost-side impact on the chemical sector. Second, it uses weekly operating rates and inventory data as leading indicators of industry prosperity, identifying sub-sectors with rising prosperity or improving supply-demand through horizontal comparison of data changes across different chemical sub-industries (e.g., polyurethane, polyolefins, polyester chain). Finally, combining cost pass-through logic with valuation levels, it maps macro and meso judgments to specific stock selection, distinguishing between three types of companies: cost-beneficiaries, leaders undergoing revaluation, and those facing short-term pressure.

Methodology notes

• Industry/Sector Analysis FrameworkVolume-Price Breakdown

  Judging the prosperity of chemical sub-sectors through high-frequency tracking of operating rates (volume) and inventory (result of supply-demand balance)

  The chemical industry has strong cyclical attributes, where prices and profits often lag behind physical volume indicators. By tracking weekly changes in operating rates and inventory destocking speeds, the report can capture early signals of industry inflection points before the earnings season, such as the sharp rise in MDI operating rates this week预示ing tight short-term supply and demand for this product.

• Industry/Sector Analysis FrameworkUpstream-Midstream-Downstream Supply Chain Transmission

  Stock selection based on the differentiated impact of crude oil price changes on companies with different process routes

  Crude oil is the pricing anchor for the chemical industry, but companies have different cost structures. When oil prices fall, downstream enterprises using naphtha as raw material (e.g., polyester leaders) see the most direct cost improvement; whereas companies using alternative routes based on coal or light hydrocarbons (e.g., Baofeng, Satellite) may see their relative cost advantages narrow. This supply chain transmission mechanism is one of the core logics for selecting cyclical stocks.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Tongkun Group (601233.SS)

  Beneficiary: As a polyester filament leader, directly benefits from cost improvements driven by falling raw material prices

  Strengths

  High sensitivity to raw material costs, large profit elasticity during periods of falling oil prices

  Comparison

  Compared to alternative route enterprises like Baofeng Energy, it holds a greater cost advantage in a falling oil price cycle

  Risks

  Significant fluctuations in international oil prices leading to unstable profitability

• Wanhua Chemical (600309.SS)

  Beneficiary: Chemical leader with valuation reshaping potential, and MDI operating rate has rebounded significantly

  Strengths

  MDI operating rate rose 9ppt week-on-week to 83%, solidifying its industry position

  Comparison

  Compared to pure cyclical stocks, it possesses stronger growth attributes and valuation repair space

  Risks

  Macroeconomic uncertainty suppressing demand for chemical products

• Yangnong Chemical (600486.SS)

  Beneficiary: Pesticide leader with valuation reshaping potential

  Strengths

  Leader in its niche segment, with relatively robust earnings stability

  Comparison

  Like Wanhua Chemical, it is viewed as a favored revaluation-type leader

  Risks

  New capacity coming online faster than expected, leading to deterioration in fundamentals

• Baofeng Energy (600989.SS) / Satellite Chemical (002648.SZ)

  Short-term Pressure: As alternative-route olefin producers, their relative advantage weakens when oil prices fall

  Strengths

  Still possess cost competitiveness in the long term

  Weaknesses

  Face pressure from the restored competitiveness of oil-based routes in the short term

  Comparison

  Opposite benefit logic compared to oil-based downstream enterprises like Tongkun during periods of falling oil prices

  Risks

  Persistently low crude oil prices undermining the economics of alternative routes

• Jereh Shares (002353.SZ)

  Beneficiary: Benefits from energy infrastructure demand driven by AI development

  Strengths

  Construction of AI computing centers drives demand for power and energy equipment

  Comparison

  Distinct from traditional chemical cyclical logic, possessing tech-growth attributes

  Risks

  Capital expenditure in the oil and gas sector falling short of expectations

Key data

• Q326E Average Brent Crude Price Forecast$85/barrelBased on the assumption of a quick resolution to the Middle East conflict and reopening of the Strait of Hormuz
• MDI Operating Rate83%Rose 9 percentage points week-on-week, the strongest performer among chemical products
• Polyester Filament Inventory-16% week-on-weekSignificant destocking, but still up 66% year-on-year; sustainability needs monitoring
• China's Total Crude Oil Inventory1.28 billion barrelsDecreased by 16 million barrels week-on-week, indicating tightening supply or warming demand
• State-Owned Refinery Operating Rate67.18%Decreased by 0.6 percentage points week-on-week

Impact & implications

The report believes that the easing of the Middle East conflict will be an important catalyst for the chemical sector. For companies with high raw material cost proportions (e.g., polyester leader Tongkun Group, phosphorus chemicals), the drop in oil prices means a direct repair of profit margins. For industry leaders like Wanhua Chemical and Yangnong Chemical, the elimination of geopolitical risks helps reshape the valuation system. Meanwhile, AI development is also seen as a new source of demand growth, benefiting Jereh Shares and some fluorine chemical material companies. However, note that in the short term, olefin producers with non-oil-based alternative routes (Baofeng Energy, Satellite Chemical) may face relative pressure due to the restored competitiveness of oil-based routes.

Risks

• Sharp decline or severe volatility in crude oil prices, affecting the earnings stability of chemical companies
• Macroeconomic uncertainty leading to chemical product demand falling short of expectations
• New capacity coming online faster than expected, causing a sharp deterioration in the supply-demand landscape for chemical products
• Oil and gas reserves and production efficiency improvements falling short of expectations (for upstream sectors)

What to watch

• Actual implementation of subsequent Middle East conflict resolutions and progress in restoring crude oil supplies
• Marginal changes in weekly operating rates and inventory data across various chemical sub-sectors
• Actual demand pull from AI development for fluorine chemical materials and energy equipment
• Content of upcoming conference calls for chemical material companies